What Is Creditworthiness?
You may have heard or read the term “creditworthiness” when researching credit cards or a loan. Creditworthiness plays a major role in having your applications approved. The name sounds pretty self-explanatory—creditors are describing how worthy you are of credit. More specifically, the term creditworthiness is used to describe the likelihood that you’ll default on a credit obligation.
How Do Creditors and Lenders Determine Creditworthiness?
Your creditworthiness is based on how you’ve handled credit and debt obligations up to this point.
Creditors can tell how well you've managed your previous credit obligations by looking at your credit report, which is a record of the activity on your credit accounts. Credit reports can be dozens, sometimes even hundreds, of pages long and very time consuming for a person to review. Rather than review your complete credit report to determine your creditworthiness, creditors and lenders use credit scores, which are an objective measure of your creditworthiness based on your credit report information.
A credit score is a three-digit number, often ranging between 300 and 850. The higher your credit score, the more “creditworthy” you are. That means you’re more likely to repay your debt obligations on time. The more creditworthy you are, the more creditors and lenders are willing to approve your applications and give you a lower interest rate.
How often you pay your bills on time is the biggest factor that affects your creditworthiness.
Recent late payments and other delinquencies can make you less creditworthy and, as a result, make it harder to get approved for new credit cards and loans.
Your creditworthiness is also affected by the amount of debt you're carrying. Having high credit card balances, for example, can make it more difficult to have your applications approved.
The best habit for your creditworthiness is to keep your credit card balances below 30 percent of the credit limit and pay down your loan balances. Minimize your new applications for credit, only applying for new items as you need to.
Creditworthiness Between Various Creditors and Lenders
What counts as creditworthy can differ depending on the type of account you’re applying for. Generally speaking, the bigger the debt you’re taking on the more creditworthy you need to be. For example, mortgage lenders tyically have higher standards of creditworthiness than credit card issuers.
You can be approved for some credit cards with a lower credit score. On the other hand, you might have a hard time being approved for a mortgage or auto loan with a lower credit score.
How You Can Improve Your Creditworthiness
Keeping track of your credit score is the best way to stay on top of your creditworthiness. You can check your credit score for free by signing up for Credit Karma, Credit Sesame, or Wallet Hub. These services give you access to your credit score as well as tips on improving your credit score and your creditworthiness.
If you’re having trouble getting approved for new accounts, you can improve your creditworthiness.
Essentially, you have to prove to creditors and lenders that you’re not at risk of defaulting on new credit obligations.
Start by taking care of past due accounts and debt collections. If you can negotiate a pay for delete, the creditor will remove the account in exchange for payment. Even without a pay for delete, paying the account will benefit your creditworthiness.
Build a positive payment history by paying timely payments on your accounts going forward. If you don’t have any active, open accounts, consider opening a secured credit card to add a new account to your credit report. As you make timely payments on your secured credit card, you’ll improve your creditworthiness and your ability to be approved for other credit cards and loans.
Be willing to make a bigger down payment on loans. You may be able to get approved for a mortgage or car loan even without the best creditworthiness if you make a larger down payment.
A bigger down payment reduces the amount of risk the lender has to take on.
Find a cosigner. Having a cosigner can also improve your odds of getting approved. That’s if your cosigner is creditworthy. When someone cosigns with you, they’re agreeing to be responsible for payments on your credit card or loan whenever you’re unable to make these payments on your own. Be careful with having someone cosign for you—falling behind on your payments will affect your credit and theirs.
Staying on top of your creditworthiness is important even when you don't have a credit card or loan application planned for the near future. Many other businesses, like cell phone carriers and cable service provides, consider your creditworthiness, too. Keeping your credit in the best shape at all times means you never have to worry when a business needs to check your credit.